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Copying Warren Buffett harder for investors today

By JOSH FUNK AP Business Writer

Posted:
05/03/2013 12:16:34 AM EDT

OMAHA, Neb.—Investor Warren Buffett has a knack for explaining what he does in simple terms that sound easy to follow, and his ranking as one of the world's richest men inspires many to copy his moves.

"Always get more for your money than you pay," Buffett said Thursday when summarizing the key to investing success.

But in recent years, copying Buffett has become harder because most investors lack his connections and the massive pile of cash held by his company, Berkshire Hathaway.

Just consider Berkshire's recent deal to buy half of ketchup-maker H.J. Heinz Co. for $12.12 billion. Buffett said that the $23.3 billion deal got started on a private flight he shared with a friend and fellow billionaire from Brazil, and you'd have to have at least a few billion free to get in on it.

Or look at the deals Buffett made during the financial crisis to lend cash and credibility to companies like Goldman Sachs in exchange for steep interest. Goldman paid Berkshire 10-percent interest on $5 billion and offered stock warrants in exchange for Buffett's endorsement and cash.

Still, that won't keep more than 30,000 from filling an arena and several overflow rooms at Berkshire's annual meeting in Omaha on Saturday. Those investors will hear the 82-year-old Buffett and 89-year-old vice chairman Charlie Munger answer questions for more than six hours.

The crowd comes to tap the wisdom of two great investors, to meet up with friends and just to experience the event Buffett likes to call the "Capitalists' Woodstock.

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KBW analyst Meyer Shields said it's really quite hard to copy what Buffett does these days.

"In many ways, the deals are more complicated than they appear," Shields said.

Part of why it's so much harder to copy Buffett's investments today is that the kind of deals he pursues have evolved with Berkshire's growth.

The Omaha-based company—which was once home to little besides its namesake textile mills, an insurance company and investments—is now a major conglomerate with more than 80 subsidiaries that together generate roughly $1 billion a month for Buffett to invest.

Berkshire had nearly $47 billion on hand at the end of 2012, which allows Buffett to consider investments most people can't.

Back in 2011, Buffett said he dreamed up a $5 billion investment in Bank of America Corp. while sitting in a bathtub. Later he called up the bank's CEO and pitched the deal that's earning Berkshire 6 percent interest and gave Buffett's company warrants to buy 700 million shares of stock at $7.14 apiece.

"Warren Buffett is kind of a master financier now," Shields said.

Earlier in his career, Buffett primarily invested in stocks. Now, he mostly looks for entire companies he can buy, preferably big ones, because he needs big deals to make a significant difference in Berkshire's bottom line.

"We really focus more on the logic he was using in the 1980s when he was a major buyer of stocks," said Bill Smead, founder of Smead Capital Management.

When Buffett does invest in stocks for Berkshire, he tends to buy large blocks worth at least several hundred million. One of his most recent investments was an $11 billion stake in IBM.

Robert Miles, who has written three books on Berkshire Hathaway, said individual investors should be able to find more attractive investments than IBM because they can consider small and medium-size companies that are cheaper than Buffett's picks.

"It's harder and harder to follow Buffett, but I would argue you don't want to follow him," said Miles, who teaches a class on Buffett's investing approach at the University of Nebraska at Omaha.

Sometimes it may be possible for individual investors to adapt something Buffett does for their own use.

For instance, when Berkshire announced plans to acquire BNSF railroad in 2009, investors may have looked at other railroad stocks. Or when Buffett talked at last year's annual meeting about why Berkshire had bought a few newspapers, it might have prompted some investors to rethink media investments.

It's much more useful for individuals to follow Buffett's investing tenets than to try to copy his moves, said author and investor Jeff Matthews, who wrote "Warren Buffett's Successor: Who It Is and Why It Matters."

Investors who want to learn more about Buffett's approach can also find the elements of his success outlined in his annual letters. Buffett said he always sticks to industries and companies that he understands. He looks for quality companies with an enduring competitive advantage. Then he invests when he's sure a company is selling for less than he estimates it is worth.

Early on in his career, Buffett could buy stocks when they were selling for half of what the companies were worth, but Matthews said Buffett now often pays close to full price for companies that Berkshire acquires to get sizeable, quality companies.

If investors really want to profit from Buffett's ideas, they can always take the direct route and buy some Berkshire Hathaway stock.

And owning Berkshire stock gives investors the chance to join 30,000 other like-minded folks in Omaha at the annual meeting where Buffett will once again make it all sound simple.

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